Bank Lending Still Sluggish

The Wall Street Journal reports:

The willingness of banks to lend money to consumers rose more than it has in 17 years, but sluggish loan growth is weighing on a key measure of profitability.

Big banks eased lending standards and businesses sought more loans in the first quarter of the year, the Federal Reserve said. In its quarterly Senior Loan Officer Opinion Survey released Monday, the Fed said the share of banks "that reported having become more willing to make consumer installment loans rose to its highest level since the first half of 1994."

But consumer demand for loans is spotty. Demand for auto loans increased, but credit cards and other installment loans remained flat while mortgage demand continued its slide, according to the survey.

The slack demand has kept a lid on banks' top-line revenue growth. While banks have been reporting solid profits, much of that has come from the release of reserves to cover bad loans. Revenue growth remains elusive and has been shrinking at most major banks.

That is one reason why bank stocks have performed poorly over the past year, with the KBW Bank Index falling 7.9% while the broader market as measured by the Dow Jones Industrial Average surged more than 16%.

Such low revenue squeezes one key measure of bank profitability, net interest margin, or the difference between what they earn on assets minus the cost of deposits and other liabilities. Last year, aided by the Fed's reduction of short-term interest rates to close to zero in 2008, depositors received the lowest interest rate—0.86%—since the 1950s, according to the Federal Deposit Insurance Corp. Net interest margin for big banks hit an eight-year high of 3.77% in 2010.